The report of the IMF's Article IV consultations with Government of India is out. It's generally a data rich report.
Pointing to significant scope for improving its communications strategy, the report shows that RBI's monetary policy decisions have surprised the market far more often than with peers.
The low level of foreign debt and adequate foreign exchange reserves are important cushions against external vulnerabilities.
Since the GFC, central government revenues have remained more or less stable at 10-11% of GDP, with direct taxes being the stablest.
However, since 2012-13, central government subsidies have been coming down, almost halving by 2019-20 before Covid hit.
This subsidy reduction is very impressive. However, it's not been accompanied by any proportionate increase in capital expenditure. Pre-dating Covid and since the GFC, the government capital spending has remained lower, The main culprit, on a long term basis, appears to be the central government. Its expenditure has remained stuck at 1.7-1.8% of GDP for entire last decade.
But stress tests points to likely Covid 19 induced problems for both corporates and banks going forward.
As regards public debt, the Covid 19 backstop measures have pushed it into a new higher trajectory. Long-term fiscal consolidation depends on economic growth rate. The IMF projections show that under a constant primary deficit of -2% of GDP and an interest rate-growth differential of about -3.5%, debt would decline to 70% of GDP in about 20 years.
The staff projections point to a medium-term potential output growth of 6%, a decline by 25 basis points. A lower growth rate is a big concern on the fiscal consolidation path.
The positive feature is that the public debt is both overwhelmingly domestic and medium to long-term, thereby limiting any external or internal vulnerabilities.
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